How Much Should You Save for Retirement?

Experts recommend saving 10% to 15% of your income each year, but you can calculate a more personalized goal in four simple steps.

Arielle O'SheaAug 8, 2017
How Much Should You Save for Retirement?
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It’s the million-dollar question — literally: How much should I save for retirement?

As a rule of thumb, most experts recommend an annual retirement savings goal of 10% to 15% of your pretax income. High earners generally want to hit the top of that range; low earners can typically hover closer to the bottom since Social Security will usually replace more of their income.

But rules of thumb are just that, and how much you should save for retirement will depend a lot on your future, both the known and unknown parts, such as:

  • Your life expectancy

  • Your current spending and saving levels

  • Your lifestyle preferences in retirement

Here are four steps to figure out how much you should save for retirement.

1. Estimate future income needs

Fair warning: This step involves the most work — but power through, because the others are a breeze. And if you keep even a loose budget, you already have a leg up. Projecting future income requirements begins by taking a look at current spending.

To do that, enter your typical monthly expenses in the first column of a spreadsheet or jot them on a piece of paper. Then do a little thinking about whether each expense will stay the same, go down, go up or — best of all — disappear in retirement. (In a perfect world, we’re looking at you, mortgage.) In a second column, write your best guess of what each expense will be in retirement.

Add those up, tack on other things you may not budget for now but want to spend money on later — travel, golf, mahjong supplies, ballroom dance lessons — and you will have a rough idea of your monthly spending needs in the future. Multiply by 12 to get the income you’ll need each year to meet those expenses in retirement. Compare that to your current income to arrive at what’s called a replacement ratio, or how much of your income you should aim to replace in retirement.

2. Consider common rules of thumb

Less than half of workers have tried to calculate how much money they need for retirement, according to the Employee Benefit Research Institute’s retirement confidence survey. That means at least 50% of you are not going to do the exercise outlined in step 1. (If you did complete step 1 and got a ratio in the 70% to 90% range, congrats — you probably can skip to step 3.)

If you're among the 50% who won’t do the exercise, this is the point to fall back on income-replacement rules of thumb. They’re not as accurate because they’re a one-size-fits-all solution to a problem that comes in many shapes and sizes. But they’re far better than nothing.

If you’re saving 15% of your income now, you could easily live on 85% of your income in retirement — without adjusting expenses.

The one used most often is the 80% rule, which says you should aim to replace 80% of your preretirement income. This is a loose rule: Some people suggest skewing toward 70%; some think it’s better to aim for a more conservative 90%.

To figure out where you land, consider what percentage of your income you’re saving for retirement. You’ll no longer have to do that once you cross the hypothetical finish line, which means if you’re saving 15% now, you could easily live on 85% of your income without adjusting expenses. Add in Social Security, cut payroll taxes — which eat 7.65% of your income while you’re working — and you can probably adjust that income down even further.

» Learn more: Everything you need to know about how to save for retirement 

The best way to use a rule of thumb like this is as a gut check against the more tailored approach of taking a deep dive into your expenses. Are you way off the standard advice or pretty close? But it can also be used as a starting point of its own, from where you can wiggle the numbers.

3. Use a retirement calculator

If your estimates are correct, a good retirement calculator will give you an assessment of where you stand in your savings progress, by combining those annual spending estimates with projections. Most thorough calculators bake in assumptions that are based on research: There will be defaults for inflation projections, life expectancy and market returns.

» Run the numbers: Use NerdWallet’s retirement calculator to estimate your future needs

To get the most accurate result, you should consider whether those assumptions are correct given your situation: Is your investment strategy poised to hit the default return used by a calculator, which will probably hover around 6% or 7%? If you’re skewing toward bonds, you’re going to want to adjust that down. Did your grandmother and your grandmother’s grandmother live to 110? You’ve got good — but expensive — genes. Take those extra years you may live into account in your projections.

4. Revisit regularly

Circumstances change and your retirement needs will change with them. Whether it’s a new job, a new baby or a new passion to travel the world once you hit 65, it makes sense to perform these retirement calculations fairly often. It’s always better to adjust as you go, rather than struggle to catch up down the road.

If you feel overwhelmed, it's easy to get help with balancing your financial goals. Choices range from low-fee online robo-advisors to financial advisors offering a variety of services. Learn more about how to choose a financial advisor that's right for you.